Trade Of The Week: Will USD Continue to Reign Supreme?

The past few weeks have been rough for the greenback thanks to renewed risk sentiment and markets scaling back bets for further aggressive Federal Reserve interest rate increases. Since the start of Q4, the dollar has depreciated against almost every single G10 currency – shedding more than 6% against the Norwegian Krone and over 5.7% versus the New Zealand Dollar.

Since hitting a fresh 20-year high above 114.50 back in late September, the Dollar Index (DXY) seems to be respecting a bearish channel, creating fresh lower lows and lower highs. With prices trading below the MACD and approaching the 110.00 support, a breakdown could be on the horizon.

There was a similar move on the equally-weighted dollar index which is wobbling above 1.2400 as of writing.

With the path of least resistance on the technical charts pointing south and the fundamentals slowly swinging in favour of bears as investors trim Fed hike bets, the dollar could end Q4 on a negative note. However, there are a couple of key US economic reports and one more Fed meeting in December which could heavily influence the dollar’s medium to longer-term outlook.

In the meantime, the dollar may be waiting for a fresh fundamental spark…and this could be the US inflation report on Thursday.

The Low Down…

Last week, king dollar surrendered its gains thanks to the improving market mood and growing expectations around the Federal Reserve delivering smaller rate hikes.

The Fed hiked interest rates by 75bps for the 4th straight time and Jerome Powell sent a clear message to markets about the potential for rates to peak higher than expected. Given how this move poured cold water around a dovish pivot, dollar bulls were injected with renewed confidence.

However, the jobs report for October sent mixed signals about the US labour market. Although the Nonfarm payrolls surged by 261k in October, above market forecasts of 200k – the unemployment rate rose to 3.7%, still close to a 50-year high. The mixed jobs report combined with soft economic data prompted market players to price in smaller rate hikes in the future. According to Bloomberg, traders have priced in a 50bps rate hike in December with the probability of a 75bps move only at 25%.

These reduced Fed hike bets may keep the dollar subdued ahead of the next major risk event. On a technical front, the damage is already being done on the equally weighted USD index which is struggling to keep above 1.2400. A breakdown below this point could trigger a selloff towards 1.2340 in the near term.

Will CPI Data Revive USD Bulls?

The greenback is set to remain choppy and shaky ahead of the latest US inflation reading on Thursday.

Markets expect the headline CPI to have increased 8% year-on-year in October, down from 8.2% in September. In regards to Core CPI, which strips out the volatility from food and energy prices, it is expected to remain at a 40-year high of 6.6%.

If the US inflation data exceeds market expectations, this may rekindle expectations around the Fed delivering jumbo hikes – resulting in a strong US dollar. Although a scenario where prices begin to slow may weaken the dollar and reduce rate hike expectations, inflation is still well above the Federal Reserve’s safe zone.

Time for Dollar to Sell Off?

The equally weighted dollar index could be preparing to tumble lower if 1.2400 proves to be unreliable support. Prices remain in a bullish channel on the weekly charts but the heavily bearish candle printed last week signals a potential breakdown. Such a development could open the doors back towards 1.2184 and 1.1900, respectively. Should 1.2400 prove to be solid support, prices may rebound back towards 1.2500, 1.2750, and 1.2800, respectively.

For more information visit FXTM.

Mid-Week Technical Outlook: US Dollar

Since the start of Q4, dollar bulls have been missing in action as investors bet the Federal Reserve will slow the pace of rate hikes in the face of slowing economic growth.

This has pushed the Dollar Index (DXY) to its lowest level in five weeks, injecting bears with enough confidence to attack 110.00. Given how the dollar may weaken further on Fed pivot hopes, this could drag the DXY towards 109.00 in the near term.

We can see a similar theme in the equally-weighted USD index. Prices are under pressure on the weekly charts. Sustained weakness below 1.2500 could open the doors towards 1.2184.

EUR/USD Back Above Parity

As the dollar struggles across the board, this has offered an opportunity for currencies to fight back. Euro bulls wasted no time in pushing the EURUSD back above parity for the first time in five weeks. With dollar bulls missing in action amid Fed pivot hopes, and the ECB expected to raise rates by 75 basis points on Thursday, this has propelled the EURUSD towards 1.0030. A daily close above parity could encourage a move towards 1.0100 in the short term. If parity proves to be unreliable support, we could see a decline back toward 0.9900.

GBP/USD Breaks Above 1.1490

Pound bulls blasted above the 1.1490 resistance level this morning thanks to a weaker dollar. Prices have turned bullish on the daily timeframe and could hit the 100 SMA in the short term. A strong break above this level may see prices test the daily bullish channel around 1.1850. Should the upside lose momentum, a move back toward 1140 could be on the cards.

AUD/USD Eyes 0.6550

It looks like AUDUSD bulls are back in town. The sharp rebound witnessed today could signal the return of bulls with 0.6550 acting as a key point of interest. A strong break above this level could see the currency pair target the 50-day SMA and higher. Should 0.6550 prove to be a tough resistance to crack, the AUDUSD could return towards 0.6340 and 0.6200, respectively.

USD/JPY Capped Below 149.00?

After creating consistently higher highs and higher lows, USDJPY bulls could be taking a break. Prices are trading back below 149.00 thanks to fundamental forces and may sink lower due to a weaker dollar. Bears may target 145.00 and 143.50 which is where the 50-day SMA resides.

Watch Out for the NZD/USD

It looks like the NZDUSD could be gearing for a major breakout above 0.5800. Such a move could open a path toward the 50 day SMA at 0.5880 and 0.5900. A scenario where 0.5800 holds the forte may send prices back towards 0.5720 and 0.5560.

For more information visit FXTM.

Trade Of The Week: Big Week For Dollar As NFP Looms

G10 currencies were practically pulverized by the greenback’s dominance with the pound shedding roughly 17% and yen over 20%.

After hitting a fresh 20-year high above 114.50 last week, the Dollar Index (DXY) tumbled thanks to a sharp recovery in the euro & pound. Given how the euro makes over 55% and the pound more than 10% of the DXY weighting, any further recovery in both currencies may influence the index’s direction in the short term.

We also saw some action on the equally-weighted dollar index which failed to secure a weekly close above 1.2800.

Despite the weakness witnessed last week, dollar bulls remain in the driving seat with the fundamentals keeping the engines healthy and running smoothly. However, a fresh catalyst could be needed for bulls to switch into higher gear in the weak ahead…and this could be the highly anticipated US jobs report on Friday.

Taking a quick look at the technical picture, prices remain bullish on the weekly charts as there have been consistently higher highs and higher lows. The DXY could make a new higher low before pushing higher or simply push back above 114.50 to test 114.73 and beyond.

The Low Down…

King dollar continues to feast on aggressive rate hike bets and global recession fears.

Last week, a chorus of Fed speakers struck an almost universally hawkish note on rate hikes. We saw the 10-year Treasury move above 4% for the first time since 2008, fuelled by expectations for the Fed to launch more monetary bazookas. As concerns intensified over the hawkish policies by global central banks sparking a recession, investors turned to the dollar as a shelter of safety.

As the first month of Q4 gets underway, dollar bulls have kicked off on a shaky start. Although it has weakened against most currencies, it is still early days. Traders are predicting a 66% probability of a 75-basis point rate hike in November. If this becomes reality, that would mark the fourth consecutive jumbo-sized 75 bp rate hike in 2022 against the inflation menace. Such a move could inject dollar bulls with renewed inspiration but investors may be more concerned with what happens beyond November and the New year.

Ahead of the Fed’s next policy meeting next month, key US economic data and speeches from Fed officials may influence expectations over how aggressive rates are hiked. Given how the dollar remains highly sensitive to speculation around hikes, this could translate to volatility over the next few weeks.

The Week Ahead…

It’s all about the US jobs report on Friday.

The consensus expects the US economy to have created 250k jobs in September which comes after a fifth straight beat in August. The unemployment rate is projected to remain at 3.7% while wage growth is seen hitting 0.3%. If the pending jobs data meets or exceeds market expectations, this may reinforce bets over the Fed moving ahead with a 75 basis point rate hike in November. Alternatively, a soft jobs report may reduce the odds of another jumbo- rate hike – weakening the dollar while supporting equity markets.

It may be wise to keep a close eye on the numerous speeches from Fed officials throughout the week. If Fed speakers remain hawkish and signal more aggressive hikes, this could keep dollar bulls hydrated ahead of the US jobs report. On the other hand, any hint of doves may see dollar bears enter the scene.

Dollar Set to Rebound?

After failing to secure a weekly close above 1.2800, the equally-weighted dollar index has edged slightly lower. Nevertheless, the fundamentals remain in favour of bulls and this could limit downside losses.

Bulls need to push back above 1.2800, to open a path back towards 1.2880 and higher. Sustained weakness below 1.2800 may open the doors towards 1.2500 and 1.2184.

Should 1.2500 prove to be reliable support, a rebound back towards 1.2800 could be a possibility.

For more information visit FXTM.

Mid-Week Technical Outlook: Dollar Dominates FX Space

Major currencies have been crushed by the dollar’s meteoric rise this month with the British Pound and New Zealand dollar shedding over 8%. Given how the dollar continues to draw strength from aggressive rate hike bets, geopolitical tensions, and positive US economic data – more upside could be on the cards.

With more Fed officials scheduled to speak this week, this may translate to more volatility on the dollar. Where there is volatility, there are potential opportunities.

Our focus today will be mainly on USD crosses with the tool of choice none other than technical analysis.

DXY Bulls Unstoppable?

The dollar’s appreciation over the past few days has been phenomenal. Bulls remain supported by key fundamental forces with the technicals signalling further upside. Prices are trading around 114.70 as of writing with the next key point of interest at 115.00. A strong breakout above this level may open the doors towards 115.34 and 118.75. Should 115.00 prove to be strong resistance, a decline back towards 113.30 and 111.60.

EUR/USD Eyes 0.9500

An appreciating dollar has dragged the EURUSD well below parity. Prices are heavily bearish on the daily timeframe with the candlesticks respecting a bearish channel. A strong breakdown below 0.9500 could open a path towards 0.9300. If 0.9500 proves to be tough support to crack, a rebound back towards 0.9900 and parity could become reality.

GBP/USD Preparing to Resume Selloff

It’s been a rough week for the GBPUSD. After hitting an all-time low on Monday, we saw the currency stage a sharp rebound. Nevertheless, prices remain heavily bearish with a break back below 1.0600 suggesting a decline towards 1.0520 and 1.0350, respectively. Should prices rebound back towards 1.0850, the currency pair could test 1.1000 and 1.1350.

AUD/USD Bears Eye 0.6200

Aussie bears remain in the driving seat as the currency pair descends lower with each passing day. There have been consistently lower lows and lower highs while the MACD trades to the downside. A strong breakdown below 0.6350 could encourage a decline towards 0.6270 and 0.6200.

USD/JPY Breakout on the Horizon

It’s all about the 145.00 level on the USDJPY. A stronger dollar could encourage bulls to conquer this resistance, opening the doors towards 147.00 and higher. Given how this level has stood the test of time. A rejection from this point could result in the USDJPY trading back within its current range.

NZD/USD Rebound in the Process?

After dropping over 500 pips this month, could the NZDUSD be preparing for a rebound? There have been consistently lower lows and lower highs while the MACD trades to the downside. Prices recently staged a strong rebound from the 0.5560 level with bulls eyeing 0.5720 and 0.5800, respectively, below 0.55600 – prices may sink towards 0.5500.

For more information visit FXTM.

Week Ahead: Fed to Fan Red-Hot US Dollar?

Take your pick: the US Federal Reserve, the Bank of England (meeting delayed from last week), the Bank of Japan, and Norges Bank (the central bank of Norway) are all set to hold their respective policy meetings.

Though of course, the Fed surely takes centre stage considering that it’s the most powerful central bank in the world and holds so much sway across global financial markets.

Calendar for Next Week

Here’s what to expect for the coming week:

Monday, September 19

  • UK markets closed for funeral of Queen Elizabeth II

Tuesday, September 20

  • JPY: Japan August CPI
  • CNH: China loan prime rates
  • AUD: RBA September meeting minutes
  • CAD: Canada August CPI

Wednesday, September 21

  • USD: Fed rate decision
  • US crude: EIA weekly oil inventory report

Thursday, September 22

  • NZD: New Zealand 3Q consumer confidence, August external trade
  • JPY: Bank of Japan policy decision
  • NOK: Central Bank of Norway rate decision
  • GBP: Bank of England rate decision
  • USD: US weekly initial jobless claims
  • EUR: Eurozone September consumer confidence

Friday, September 23

  • AUD: Australia September PMIs
  • EUR: Eurozone September PMIs
  • GBP: UK September PMIs and consumer confidence
  • CAD: Canada July retail sales

Hawkish Expectations

Here’s what markets are forecasting for the upcoming Fed decision due mid-week:

  • 75 basis point hike fully priced in.
  • 25% chance of a 100bps hike.
  • US interest rates to peak around 4.5% by March 2023 (from the current 2.5%, before the September FOMC meeting next week).
    That’s an extra 50 basis points on top of the 4% peak forecasted just this time last week (before the latest US CPI was released – more on that in a bit).

Such hawkish expectations (that the Fed would have to trigger more of these outsized rate hikes to combat stubbornly elevated inflation) has restored this equally-weighted US dollar index back to its recent peak, trading around levels not seen since the onset of the global pandemic.

The ramp-up in expectations for a more aggressive Fed came in the wake of the US August consumer price index (CPI) released on September 13th.

We learned that inflation rose by a higher-than-expected 8.3% in August, compared to the 8.1% figure forecasted by economists.

The core CPI print (excluding more volatile items such as food and energy prices) also came in 0.2 percentage points above the forecasted 6.1% figure.

In other words, US inflation remains stubbornly elevated, despite the Fed having already hiked by 225 basis points since March.

Recall how before this week’s US CPI release, some segments of the markets believed that the Fed may just be contented with a 50bps hike at the September FOMC meeting.

Such expectations have been dashed by the hotter-than-expected August CPI that was unveiled earlier this week.

The higher-than-expected inflation numbers are set to frame the Fed’s upcoming pivotal decision.

  • Should the Fed indeed trigger that gargantuan 100bps hike, that may send this equally-weighted USD index up to 1.23, a fresh 2-year high.That 1.23 region may offer initial resistance for this USD index, as it did back in May 2020. Stronger resistance is set to arrive around 1.25, as was the case back in early April 2020.
  • However, should the Fed unexpectedly deliver a dovish shocker, perhaps by triggering only a 50bps hike or suggesting that most of its intended rate hikes are already in the past, that could see this USD index swiftly unwinding recent gains.A moderating greenback would in turn allow the rest of the FX space room to breath a massive sigh of relief.

For more information visit FXTM.

Is The US Dollar (finally) Peaking?

In short

Following the ECB’s 75 basis point hike, markets are preparing for a shift from monetary policy divergence, which had been supportive for the dollar, to monetary policy convergence. Aside from the ECB, the SNB and the BoE have also signalled their willingness to act more forcefully. This has certainly removed some appeal from the US dollar. Nonetheless, we doubt that USD could experience a significant drop in the short term as growth and recession fears continue to provide support.

US Dollar Near Decade Highs

The US dollar has surged dramatically against the world’s biggest currencies this year. The greenback is up 13% against the euro, 15% against the British pound, and 20% against the Japanese yen year-to-date.

Screenshot 2022-09-11 at 14.16.43

The US dollar index (DXY), which tracks the relative value of the US dollar against a basket of important world currencies, has surged to its highest level since 2002. The index has risen 15% this year, putting it on track for its biggest annual rise since 1981.

Underpinning the dollar’s seemingly unstoppable surge is the Federal Reserve, coupled with doubts about the global economy. To dampen rampant inflation, the US central bank has embarked on the most aggressive interest-rate hikes since the 1980s, raising interest rates by 2.25% since March. Looking at market pricing, traders expect this tightening to continue into 2023, with a ceiling near 4%.

Screenshot 2022-09-11 at 14.04.15

Resilient US Economy Boosts Dollar Demand

Another factor in favour of the greenback has been deteriorating growth perspectives overseas. The meteoric rise in USD, which has led to a weaker euro, pound and yen, has worsened inflation problems in Europe, the UK and Japan, and hence has heaped pressure on policymakers to follow the Fed with aggressive rate hikes.

But the reality is that while the Fed has the luxury of sounding hawkish as the US economic data remain resilient, other central banks, especially the ECB and the BoE, do not enjoy the same leeway as their economies are already struggling with consequences from the Ukraine war. Therefore, hiking rates in this region may just worsen the slowdown and increase the odds of recession. This is why investors have preferred to hold on to the dollar.

The renewed sell-off in Treasuries this month has also again widened the yield gap between the US and Japan, pushing the yen to a 24-year low and on track for its worst year on record. This has prompted the strongest warnings to date from senior Japanese officials. Finance Minister Shunichi Suzuki said « «We’ll keep watching the markets with a high sense of urgency, and if the moves continue, we’ll respond as needed».

Despite the salvo of official warnings last week, the comments were insufficient to reverse the yen’s slide in the face of intense dollar strength. Many analysts expect that a stronger ramping up of language or possibly the calling of a trilateral meeting between the Bank of Japan, finance ministry and financial regulator in response to the sharp slide could prove more impactful.

Technical Analysis

Looking at the EURUSD and bearing in mind that much bad news is already priced into the single currency (including geopolitics, inflation and increased recession risk) – a new near-term base may be seen near parity, with higher risks to the upside should the ECB deliver on its expected rate hikes while containing a crisis in the bond market.

Regarding sterling, after another 10% sell-off in GBPUSD throughout the first half of the year and a currency that looks historically cheap and undervalued, the pound is likely to underperform peers, given domestic economic problems and political distractions.

Considering the yen, chances for continued yield-driven underperformance are high. Indeed, a BOJ rate hike seems off the agenda for now. BOJ intervention threats may resurface, but only coordinated action, which we see as unlikely for now, can reverse the trend. Ultimately, a BOJ policy U-turn and/or softer Fed will alter the yen’s fortunes, but we aren’t there yet.

Risk

Overall, we expect the dollar to hold up well over the coming months, supported by high interest rates and a resilient US economy. Nonetheless, it should be noted that USD valuations are stretched, with the currency near a 20-year high against a basket of major currencies. Moreover, Fed tightening assumptions are at peak hawkishness, which indicates the rate hike cycle may be nearing its end stages.

Looking ahead

Inflation and central banks’ tightening plans should continue to drive G-10 forex, but as we enter 3Q, growth and recession considerations could take a central role for the dollar. And although the currency may be overvalued, this isn’t enough reason to give up on the buck altogether, as there is still too much macro, earnings and geopolitical uncertainty to abandon defensive views.

Esty Dwek, CIO

Trade Of The Week: Are USD Bulls Throwing In The Towel?

The mighty dollar has been an unstoppable force in 2022, flattening everything in its path.

But back in August, we questioned whether the king of the currency markets was losing its grip on the FX throne after the Dollar Index (DXY) punched above 109.14. Our argument was based on reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures.

We were thoroughly humbled after USD bull’s stepped into higher gear, pushing the DXY to a fresh 20-year high beyond 110.00

There was also some action on the equally weighted dollar index which respected a bullish trend, pushing prices above the previous 2022 high of 1.21840.

Fast forward to today, king dollar looks shaky.

It is safe to say that it lost momentum last week and has stumbled into the new week under selling pressure. The greenback has weakened against most G10 currencies month-to-date and could extend losses despite the recent hawkish comments from Fed officials including Jerome Powell.

With inflation cooling in the US economy, this could encourage the Fed to drop its aggressive stance toward higher rates. If such becomes reality, dollar bears may receive the thumps up to enter the scene – dragging both the DXY and equally weighted USD index lower.

As we questioned roughly back in August, are dollar bulls throwing in the towel or just taking another break before ramping up the momentum in Q4? Some clues may be offered this week in the form of the US inflation figures among other key reports.

The Low Down…

Traders are predicting an 88% probability of a 75-basis point rate hike in September.

These expectations were reinforced by comments from Federal Reserve Chairman Jerome Powell who reaffirmed the need to fight soaring inflation. Hawkish comments by Fed officials last Friday also boosted Fed hike bet, making the jumbo rate hike this month almost a done deal.

Interestingly, the greenback has tumbled despite the Fed expected to hike rates by 75 basis points for the third time in a row. Fed hawks are clearly in the building while strong US economic data initially supported expectations that the US central bank would not be slowing the pace of hike anytime soon. However, US inflation likely slowed for a second month in August thanks to falling gas prices. While this may not be enough to derail the Fed from firing another monetary bazooka this month, it may impact the central bank’s decision in November and December.

The Week Ahead…

This could be another wild week for the dollar due to the pending US economic reports.

On Tuesday, the latest inflation figures will be published which are expected to show consumer prices cooling 8.1% year-on-year in August. This would be lower than July 8.5% print and would mark two straight months of easing in the headline annual print. Should the report match expectations, this could allow the Fed to drop its aggressive approach toward rate hikes – resulting in a weaker dollar.

It will be wise to keep an eye on the core CPI annual print which is expected to rise 6.1% – which will be the highest level since April. The core inflation does not include food and energy prices in the calculation because of volatility.

Much attention will be directed towards the weekly initial jobless claims, August retail sales, and industrial production figures on Thursday which could provide further insight into the health of the US economy. A strong set of reports may reinforce rate hike bets which is dollar positive, while a negative set of reports could dampen aggressive rate hike expectations – dragging the dollar lower.

Friday offers the US consumer sentiment for September. Consumer sentiment was revised higher to 58.2 back in August and is expected to hit 60 this month. A positive figure could provide USD bulls a helping hand before the week comes to an end.

Time For Dollar to Tumble?

After failing to secure a weekly close above 1.2184, the equally weighted dollar index could be preparing to tumble lower.

Prices remain under pressure on the weekly charts with a solid breakdown below 1.1900 opening a path toward 1.1700 and 1.1600, respectively. Should 1.1700 prove to be reliable support, a rebound back towards 1.1900 could be a possibility.

For more information visit FXTM.

Thursday Special: My Trading Week

Before we proceed, I know some of you are wondering what is going on here. Well, I have hijacked the Thursday 101 slot to share my thoughts and personal experiences with markets this week!

While this may not follow the normal style of our market reports, we still aim to provide key insight and information on market themes complemented with some trading setups to watch out for.

Game plan #1 – USD Hunting Gone Wrong

I marched into the trading week heavily equipped with the fundamental knowledge and technical weapons to hunt dollar bulls. With signs of easing inflationary pressures in the United States fuelling speculation around the Fed adopting a less aggressive approach towards rates, the dollar looked like an easy tasty meal. However, the greenback drew ample strength from weak Chinese economic data on Monday – eventually trampling all obstacles and G10 currencies in its path.

The bearish dollar setup I had in mind was blown out of the water. Instead of the Dollar Index (DXY) respecting the daily bearish channel, prices pushed above 106.00, signalling an incline back towards 107.30.

The same could be said for the equally-weighted dollar index which blasted back above 1.1700. Prices seem to be finding resistance around the 50-day SMA. It will be interesting to see whether this level limits further upside gains.

Game plan # 2 – If You Can’t Beat Them…Join Them

After witnessing the dollar’s rebound on Monday, I decided to hitch a ride with bulls on Tuesday.

The EURUSD snatched my attention as prices tumbled back below 1.0200. Even though the currency pair remains in a range, the path of least resistance points south with 1.0100 acting as the first level of interest. Looking at the current price action, we are not expecting any fireworks for the rest of the week. But bears seem to be creating a foundation for a steeper decline in the week ahead.

Game plan #3 – Inflation Heartache Boost BoE Hike Bets

On Wednesday morning I felt nauseous and uneasy after official data revealed that UK inflation rose 10.1% in July. As the inflation menace causes havoc across the UK economy, households are feeling the squeeze. Everything from the price of food, energy, and services is increasing dangerously. Yesterday evening I witnessed a man argue with a shop owner over the price of bread and this morning I found myself in a heated conversation with my energy provider.

Rising inflation will most likely force the BoE to aggressively raise interest rates but will also fuel uncertainty over the UK’s economic outlook. Looking at the GBPUSD, it remains in a range on the daily chart with support at 1.2000. Best to revisit this next week when more life returns to the FX space.

Game plan #4 – Riding the Volatile Yen Wave

Hats off to my intraday traders that were able to tame the Yen beast this week.

The EURJPY and GBPJPY were untamed and ready to dish out punishment to any trader unprepared. Both tumbled on Monday, only to experience a sharp rebound on Tuesday and Wednesday! We can see some resistance around 138.00 for the EURJPY and 164.00 for the GBPJPY. Should these levels hold, the currency pairs could resume their descent in the new trading week.

Game plan #5 – Classic Breakdown on Gold

The last time gold secured a daily close below $1770 was at the start of the month. After flirting within a range for almost three weeks, it looks like the precious metal is ready to move lower. Interestingly, the precious metal somewhat ignored the minutes from the Fed’s July meeting.

Policymakers saw inflation as a significant risk to the economy and indicated they would not pull back on rates until inflation came down. With inflation in the United States cooling to 8.5% in July, traders have cut bets over how aggressive the Fed will be on rates. In fact, markets are currently pricing in a 47% probability of a 75bp rate hike in September.

Talking technicals sustained weakness below $1770 could open the doors towards $1752 and $1724, respectfully.

For more information visit FXTM.

Trade Of The Week: Are Dollar Bulls Running On Empty Fumes?

Dollar bulls dominated the FX space during the first half of 2022, trampling any obstacles that came their way. G10 currencies were practically flattened by the greenback’s might with the pound shedding 10% and yen over 15%.

But the scales of power seem to be veering in favour of bears in Q3 as the fundamental drivers shift. This can be reflected in the currency’s mixed performance since the start of July.

After reaching its highest level since mid-2002 back in July, the Dollar Index (DXY) has found itself vulnerable to losses thanks to profit-taking. Reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures also capped upside gains.

Taking a quick look at the equally weighted dollar index, prices staged a rebound this morning as disappointing data from China fuelled global recession fears. Nevertheless, the trend still favours bears due to the consistently lower lows and lower highs.

With inflation cooling in the largest economy in the world and investors cutting rate hike bets, USD bulls may be in trouble. However, recession fears and geopolitical risks could send investors rushing toward the dollar which acts as a beacon of safety in times of uncertainty.

So, are dollar bulls are running on empty fumes or taking a break before switching to higher gear? While we may not get the answer this week, the pending FOMC meeting minutes, US economic data, and speeches from Fed officials could offer fresh insight.

The Low Down…

There were three major drivers behind the dollar’s appreciation this year.

  1. Interest rates
  2. Strength of the US economy
  3. Dollar’s safe-haven status

The Fed’s aggressive approach towards rising interest rates in the face of soaring inflation sent the dollar rallying as rate differentials widened against other currencies. As investors looked at the strength of the US economy, relative to others this also boosted appetite for the greenback. Lastly, geopolitical risks, global growth concerns, and overall uncertainty sent market players rushing toward the world’s reserve currency.

Fast forward to today, signs of easing inflationary pressures have prompted investors to cut bets on how aggressive the Fed will be in raising interest rates. The latest CPI figures revealed inflation cooled 8.5% in July compared to the 8.7% expected and a significant drop from the 9.1% increase in June.

In regards to the US economy, it contracted for the second straight quarter in Q2, signalling an unofficial start of recession, further dampening appetite for the dollar. Given the unfavourable macroeconomic environment and geopolitics at play, investors remain cautious and this could result in increased appetite for the safe-haven dollar. All in all, when considering how 2/3 of the major drivers powering the dollar have weakened, this could encourage bears to pounce.

The Week Ahead…

It could be a volatile week for the dollar thanks to the pending US reports and speeches from Fed officials.

However, all eyes will be on the Federal Reserve meeting minutes on Wednesday. This will be closely scrutinized by investors for any fresh clues and insight into what policymakers were thinking when rates were hiked by 75 basis points for a second straight meeting. If the minutes sound hawkish, this could offer the dollar some support.

On the flip side, any hint of doves may encourage some fresh dollar weakness. It will be wise to keep an eye on the US retail sales report for July published mid-week and speeches by Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari on Thursday.

Dollar to Resume Decline?

After breaking out of the weekly bearish channel, the equally weighted dollar index could be gearing for steeper declines.

Prices turned bearish after securing a solid weekly close below 1.1700. Sustained weakness under this level could trigger a selloff towards 1.1380.

Should 1.1700 prove to be reliable support, a move back towards 1.1900 could be on the cards.

On the daily charts, prices punched higher this morning thanks to fundamental forces but the technical picture still favours bears. A move back below 1.1700 could suggest a decline towards 1.1630 and 1.1450. Should 1.1700 prove to be reliable support, prices may test the 50-day Simple Moving Average and 1.1950, respectively.

For more information visit FXTM.

3 Reasons Why the US Dollar Is Climbing

The benchmark dollar index (DXY), which measures how the USD has performed against a basket of major peers such as the euro, pound, and yen, has climbed by more than 3.3% so far in 2022 and is trading around its highest levels since May 2020.

DXY Daily chart

The buck also has a year-to-date advance against most of its G10 peers and all Asian currencies.

Why has the dollar been so strong?

Here are 3 reasons:

1) The Fed is raising interest rates

A country’s currency tends to climb alongside its interest rates.

Last week, the US central bank raised interest rates by 25 basis points for the first time since December 2018.

More importantly, the Fed indicated that it could raise rates another six times for the rest of this year, even citing the possibility of a 50-basis point hike in May. That would be like firing two bullets with a single shot.

As markets anticipate these higher rates, that has sent the US dollar upwards as well.

2) Economic resilience

Despite interest rates going up (which typically translates into slower economic growth), the US economy is expected to fare better than its major peers, namely the European Union (which has an all-out war raging off to its east) and the United Kingdom. For example, the US is less reliant on Russia for oil and natural gas, compared to the EU and the UK.

The Bank of England is already starting to pour cold water on how much it could raise interest rates, sounding more ‘dovish’ after its policy meeting earlier this month.

The European Central Bank is still pressing ahead with its plans to raise interest rates, but markets are doubting its how much the ECB can hike, considering the potential fallout from its worst security crisis since World War 2.

Noting that the euro and the British Pound account for almost 70% of the DXY, the US economy’s relative outperformance compared to the EU and the UK should keep the DXY well supported.

3) Safe haven demand

The US dollar is seen as an asset that can protect investors’ wealth when markets are facing heightened fears. In times of great uncertainty, as we’re seeing now with the Russia-Ukraine war, the US dollar welcomes investors far and wide with arms wide open.

After all, the greenback is the world’s reserve currency, is mostly widely used in cross-border transactions, and is the currency of the world’s largest economy.

Stronger Currencies than the US Dollar

However, all I just said doesn’t mean that the US dollar is climbing against every single currency.

In fact, within the G10 space, the US dollar has weakened against these four currencies thus far in 2022:

Australian dollar (AUD): 3.2%
Norwegian krone (NOK): 2.5%
New Zealand dollar (NZD): 1.9%
Canadian dollar (CAD): 0.7%
(percent figures reflect currency’s year-to-date performance against the US dollar)

And here are two main reasons why the above-listed currencies have strengthened against the greenback:

  1. Their central banks have also raised interest rates, except for the Reserve Bank of Australia, for now. More influential is the fact that markets believe that these central banks are ready to raise rates even higher in order to bring down roaring inflation.
  2. These economies are reliant on commodities.
    Given the surge in commodities in recent months, companies in these countries, along with the governments, stand to earn more money.

More money flowing into its economy = more demand for its currency = currency strength

The same rationale also applies to currencies like the Brazilian Real, which is the best-performing emerging-market currency against the US dollar so far this year.

Overall, the US dollar is expected to maintain its position of strength throughout the course of 2022 and potentially beyond.

Though as explained above, not all currencies are created equal, which means there are a number of currencies that still stand to outperform ‘king dollar’ this year.

For a look at all of today’s economic events, check out our economic calendar.

By Han Tan Chief Market Analyst at Exinity Group

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Sweden, Norway Currencies Eye Multi-Year Highs vs Euro: Reuters Poll

Sweden and Norway recently ended almost all remaining social restrictions amid a high uptake of COVID-19 vaccines and a corresponding drop in infections, allowing businesses to thrive.

After plunging when the coronavirus hit last year, the currencies have recovered to trade slightly stronger against the euro than their pre-pandemic levels. They will continue to rise, but the likely scope of gains is more limited, the poll showed.

Norway’s crown has rallied about 6% since late August to trade at around 9.94 against the euro and could move to 9.83 in the coming year, the poll showed, which would be its strongest level since January 2020.

Analysts attribute the crown’s lift in recent weeks to hawkish monetary policy and a surge in the price of Norway’s oil and gas exports.

Norges Bank last month raised rates for the first time since 2019 and plans four more hikes over the coming 15 months, with the next tightening pencilled in for December.

But the often-volatile Norwegian currency is also at risk of periods of decline and is forecast to be weaker than its current level at the end of 2021 before rising again next year.

“NOK is no safe haven in troubling times and could easily weaken if sentiment in markets sours,” Nordea Markets cautioned.

In Sweden, where the currency has weakened slightly against the euro this year, the crown is expected to make gains over the coming 12 months to hit its strongest level since early 2018, the poll showed.

The Riksbank has held its benchmark repo rate at 0% and expects to keep it there for several more years despite strong economic recovery and above-target inflation.

Nonetheless some economists see the rebound in the Swedish economy as an opportunity for the central bank to tweak its overall monetary policy approach in 2022.

“The stars are starting to align behind our view that policymakers will start to allow the balance sheet to contract next year,” Capital Economics said in a recent note to clients.

The Reuters poll predicted the Swedish currency would make gains of around 2.5% against the euro to trade at around 9.92 one year from now, the median forecast showed.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Terje Solsvik in Oslo; polling by Prerana Bhat, Sarupya Ganguly and Indradip Ghosh in Bengaluru; Editing by Jonathan Cable, Kirsten Donovan)

Marketmind: Not Nice Out There

A look at the day ahead from Sujata Rao.

Brent crude has hit new three-year highs above $80 a barrel after OPEC+ producers stuck to their output policy despite pressure to pump more oil. Record high gas prices and below-average European inventories portend a winter of higher heating and power bills for consumers and small businesses alike.

China’s property sector problems and a power crunch that’s idling factories meanwhile pose a threat to economic growth; developer Fantasia has joined Evergrande in missing a coupon payment and borrowing costs for “junk”-rated Chinese firms have soared.

Now add in the risk of a default in the world’s biggest economy. This according to Moody’s could cause U.S. economic activity to shrink nearly 4%, eliminate at a stroke 6 million jobs and lift unemployment towards 9%.

All that is keeping U.S. 10-year bond yields well below three-month highs touched last week while sending up shortest-dated borrowing costs — one-month Treasury bill yields are at the highest since last October.

U.S. credit default swaps, derivatives investors often use to hedge exposure, have risen to one-year highs.

Energy costs, together with a dollar standing near one-year highs, will inevitably tighten global financing conditions, even as more central banks start to remove pandemic-time stimulus.

The Federal Reserve will almost certainly start unwinding stimulus from next month and New Zealand on Wednesday is expected to become the second developed country after Norway to hike rates.

Wall Street is attempting to claw back some of its losses from Wednesday when the Nasdaq plunged more than 2%. Futures are pointing higher there and European shares just opened firmer, although Japan’s Nikkei slipped to one-month lows.

Key developments that should provide more direction to markets on Tuesday:

–The Reserve Bank of Australia held their monetary policy unchanged in its Tuesday meeting, as expected.

–Japan’s services sector activity shrank for a 20th straight month in September

-UK passenger cars data

-BOE’s Dave Ramsden speaks

-ECB board member Fernandez Bollo speaks

-Fed speakers: Richmond Fed’s Thomas Barkin, Vice Chair for supervision Randal Quarles

-Euro zone PPI

-Romania central bank meets

-U.S. trade balance/ISM PMIs

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Sujata Rao; editing by Dhara Ranasinghe)

U.S. Dollar Slides for 2nd Day, But Outlook Stays Upbeat

U.S. 10-year Treasury yields were last at 1.484%, down nearly six basis points. For the week, the dollar index posted its largest percentage gain since late August, as investors looked to the Federal Reserve’s reduction of asset purchases in November and a possible rate hike late next year.

Cautious market sentiment due to COVID-19 concerns, wobbles in China’s growth and a Washington gridlock ahead of a looming deadline to lift the U.S. government’s borrowing limit has lent support to the dollar, seen as a safe-haven asset.

“The more hawkish stance appears to have been the key factor driving the dollar higher in late September,” said Marc Chandler, chief market strategist, at Bannockburn Global Forex.

“However, more immediately, fiscal policy is the focus, though investors appear to be looking through it, as many find it inconceivable that the U.S. would default on its debt,” he added.In afternoon trading, the dollar index slid 0.3% to 94.046, having gained 0.8% this week, the largest weekly rise since late August.

Friday’s batch of U.S. data was mixed, adding to dollar weakness ahead of the weekend. U.S. consumer spending increased more than expected in August, posting a 0.8% rise, but consumption was weaker than initially thought in July, dipping 0.1% instead of gaining 0.3%. Inflation remained elevated, but not by much.

Core inflation as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, was up 0.3% in August, unchanged from previous month. In manufacturing, data was more upbeat. The Institute for Supply Management (ISM) said its index of national factory activity increased to a reading of 61.1 last month from 59.9 in August. In other currencies, the euro rose 0.1% to $1.1595, falling about 1.1% for the week, its biggest percentage fall since mid-June.

The yen bounced back against the dollar from a 19-month low overnight, with the greenback last down 0.2% at 111.105 yen. Commodity currencies rallied against the U.S. dollar on Friday as well. The Australian dollar gained 0.6% to US$0.7270 and slumped 3.6% in the third quarter – the worst performance of any G10 currency against the dollar – as prices for Australia’s top export, iron ore, fell sharply. Sterling was also an underperformer last quarter, dropping 2.5%, and posting its worst week in more than a month, amid growing supply chain problems. [GBP/] Sterling was last up 0.6% though at $1.3552, just above a 9-month low at $1.3516.

In cryptocurrencies, bitcoin rallied to a nearly two-week high of just under $48,000. It was last up 9.4% at $47,902. Analysts cited seasonal factors, with the fourth quarter typically viewed as a bullish period for digital assets.

Smaller coins ether and XRP, which tend to move in tandem with bitcoin, were up nearly 10% at $3,294 and 8.2% at $1.0299, respectively.

========================================================

Currency bid prices at 3:17PM (19:17 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 94.0370 94.3120 -0.29% 4.508% +94.3950 +93.9850

Euro/Dollar $1.1596 $1.1578 +0.16% -5.09% +$1.1607 +$1.1564

Dollar/Yen 111.0950 111.2800 -0.16% +7.53% +111.4850 +110.9050

Euro/Yen 128.82 128.82 +0.00% +1.50% +129.0400 +128.5600

Dollar/Swiss 0.9305 0.9317 -0.11% +5.19% +0.9337 +0.9283

Sterling/Dollar $1.3555 $1.3477 +0.59% -0.78% +$1.3575 +$1.3434

Dollar/Canadian 1.2633 1.2685 -0.41% -0.79% +1.2738 +1.2628

Aussie/Dollar $0.7271 $0.7227 +0.62% -5.48% +$0.7276 +$0.7193

Euro/Swiss 1.0791 1.0784 +0.06% -0.15% +1.0808 +1.0773

Euro/Sterling 0.8554 0.8593 -0.45% -4.29% +0.8623 +0.8545

NZ $0.6946 $0.6897 +0.72% -3.26% +$0.6951 +$0.6879

Dollar/Dollar

Dollar/Norway 8.6125 8.7400 -1.41% +0.35% +8.7820 +8.6160

Euro/Norway 9.9891 10.1205 -1.30% -4.57% +10.1728 +9.9867

Dollar/Sweden 8.7412 8.7585 -0.08% +6.66% +8.7878 +8.7392

Euro/Sweden 10.1379 10.1460 -0.08% +0.61% +10.1755 +10.1374

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Ritvik Carvalho in London; Editing by Nick Macfie, Chizu Nomiyama and David Evans)

U.S. Dollar Slips From 1-Year High on Weak Data, Consolidation

The greenback overall has been supported by the spike in U.S. Treasury yields amid expectations the Federal Reserve will taper its monetary stimulus beginning in November even as global growth slows.

Thursday’s economic data, though, dented some of the dollar’s strength.

U.S. initial jobless claims rose for a third straight week to 362,000 for the period ending Sept. 25, data showed. Economists polled by Reuters had forecast 335,000 jobless applications for the latest week.

That said, another report confirmed that U.S. economic growth accelerated in the second quarter, at a 6.7% clip, thanks to pandemic relief money from the government, which boosted consumer spending.

“Even if the U.S. dollar falls back a bit further in the near term, we expect it to resume its recent rally in due course,” Joseph Marlow, assistant economist at Capital Economics, wrote in a research note.

“Although long-term yields have risen in most major economies, U.S. bond yields have increased by more than most and, importantly, been driven in large part by higher real yields, reflecting expectations of tighter monetary policy.”

The dollar index, which measures the currency against a basket of six rivals, hit 94.504, its highest since Sept. 28 last year. It was last down 0.2% at 94.199.

For the month, the dollar ended up 1.7%, its second straight monthly gain. For the third quarter, the dollar rose 2%.

Marc Chandler, chief market strategist at Bannockburn Forex, in a research note wrote that “a consolidative tone is evident” after the dollar’s surge on Wednesday.

The dollar’s recent gains came despite a political standoff in Washington over the U.S. debt ceiling that threatens to shut down much of the government.

Yields on the benchmark 10-year Treasury note stood at 1.524%, holding near a three-month high reached Tuesday of 1.567%.

The dollar hit 112.07 yen, the highest since February 2020. It was last down 0.5% at 111.36 yen, its biggest daily percentage fall since mid-August.

For the month of September, however, the dollar posted a 1.2% gain versus the yen, and a more modest 0.4% rise for the third quarter.

The euro was down 0.1% at $1.1586, after earlier hitting $1.1563,its lowest since July 2020.

Europe’s single currency was down 1.9% against the dollar for the month and 2.2% weaker for the third quarter.

The risk-sensitive Australian dollar firmed 0.8% to US$0.7232, after plummeting 0.9% overnight, as iron ore prices rallied ahead of the Golden Week holiday in Australia’s top trading destination China.

A slight improvement in overall risk sentiment after days of gloom was seen in the cryptocurrency markets, as bitcoin rose 5.7%% to $43,929 and ether bounced 6.2% to $3,028. Both coins are down between 20% and 27% from their September peaks.

========================================================

Currency bid prices at 3:20PM (19:20 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 94.1870 94.3440 -0.15% 4.674% +94.5040 +94.1090

Euro/Dollar $1.1588 $1.1598 -0.09% -5.16% +$1.1610 +$1.1563

Dollar/Yen 111.3700 111.9750 -0.54% +7.79% +112.0750 +111.3200

Euro/Yen 129.04 129.82 -0.60% +1.67% +129.9500 +128.8100

Dollar/Swiss 0.9323 0.9346 -0.22% +5.41% +0.9368 +0.9322

Sterling/Dollar $1.3482 $1.3427 +0.42% -1.31% +$1.3517 +$1.3417

Dollar/Canadian 1.2656 1.2753 -0.78% -0.64% +1.2763 +1.2631

Aussie/Dollar $0.7235 $0.7174 +0.86% -5.94% +$0.7257 +$0.7176

Euro/Swiss 1.0803 1.0839 -0.33% -0.04% +1.0847 +1.0802

Euro/Sterling 0.8594 0.8636 -0.49% -3.84% +0.8643 +0.8578

NZ $0.6912 $0.6866 +0.71% -3.72% +$0.6921 +$0.6860

Dollar/Dollar

Dollar/Norway 8.7315 8.7860 -0.55% +1.76% +8.8295 +8.7140

Euro/Norway 10.1196 10.1740 -0.53% -3.32% +10.2315 +10.1054

Dollar/Sweden 8.7513 8.8067 -0.72% +6.77% +8.8118 +8.7383

Euro/Sweden 10.1406 10.2141 -0.72% +0.64% +10.2167 +10.1320

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Ritvik Carvalho in London; Editing by William Maclean, Hugh Lawson and Jonathan Oatis)

Dollar Advances to One-Year High; U.S. Debt Ceiling Impact Muted

The greenback also fared well despite an impasse in Washington over the U.S. debt ceiling that threatened to plunge the government into a shutdown.

The world’s largest reserve currency, seen as a safe-haven bet at times of market stress, has strengthened in recent days as investors instead focused on fears of a global slowdown, a rise in energy prices and higher U.S. Treasury yields.

Traders are also concerned that the Fed will start to withdraw policy support just as global growth slows.

“Fed has sounded the starting gun on monetary policy normalization,” Kit Juckes, macro strategist at Societe Generale, wrote in his latest research note.

“As the U.S. escapes the interest rate zero-bound, leaving the Eurozone and Japan behind, the global savings glut is set to be drawn towards the dollar, which can outperform the majority of other currencies in the coming year, and may start its move earlier than we expected,” Juckes added.

The dollar index – which measures the U.S. currency against a basket of six major currencies – rose for the fourth consecutive day, to 94.435, its highest since late September of last year. It was last up 0.7% at 94.404.

Erik Nelson, macro strategist at Wells Fargo in New York, sees a further 2% to 3% upside in the dollar index.

The greenback was also unfazed, even as U.S. Senate Republicans on Tuesday blocked a bid by President Joe Biden’s fellow Democrats to head off a potentially crippling U.S. credit default, with federal funding due to expire on Thursday and borrowing authority on around Oct. 18.

The Senate could vote on Wednesday or Thursday on a bipartisan resolution to fund federal operations through early December, Senate Majority Leader Chuck Schumer said.

The euro was among the currencies to lose ground, falling below the $1.16 level, the lowest since late July 2020. It last traded down 0.8% at $1.1592.

The yen showed little reaction to the election of Fumio Kishida as leader of Japan’s ruling Liberal Democratic Party, which put him on course to become the country’s next prime minister.

The yen, the currency most sensitive to U.S. yields as higher rates can attract flows from Japan, touched an 18-month low against a resurgent dollar. The dollar climbed as high as 112.04, its strongest level since late February last year, and was last up 0.4% at 111.99 yen.

The dollar also rose to a more than five-month high of 0.9355 francs. It was last up 0.7% at 0.9351.

Currency traders also took note of comments from major central bankers on Wednesday, who were panelists at a European Central Bank forum in Sintra, Portugal.

Fed Chairman Jerome Powell, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey said they were keeping a close eye on inflation amid a surge in energy prices and the persistence of production bottlenecks.

========================================================

Currency bid prices at 4:06PM (20:06 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 94.3940 93.7060 +0.74% 4.904% +94.4350 +93.6710

Euro/Dollar $1.1593 $1.1684 -0.77% -5.12% +$1.1690 +$1.1590

Dollar/Yen 111.9850 111.5150 +0.42% +8.38% +112.0450 +111.2100

Euro/Yen 129.83 130.25 -0.32% +2.29% +130.4700 +129.6800

Dollar/Swiss 0.9350 0.9293 +0.65% +5.73% +0.9355 +0.9281

Sterling/Dollar $1.3419 $1.3536 -0.88% -1.80% +$1.3554 +$1.3412

Dollar/Canadian 1.2756 1.2686 +0.56% +0.18% +1.2774 +1.2670

Aussie/Dollar $0.7176 $0.7240 -0.86% -6.69% +$0.7264 +$0.7171

Euro/Swiss 1.0839 1.0855 -0.15% +0.30% +1.0862 +1.0822

Euro/Sterling 0.8639 0.8629 +0.12% -3.33% +0.8658 +0.8613

NZ $0.6862 $0.6960 -1.39% -4.43% +$0.6962 +$0.6861

Dollar/Dollar

Dollar/Norway 8.7750 8.6605 +1.45% +2.32% +8.7880 +8.6460

Euro/Norway 10.1720 10.1219 +0.49% -2.81% +10.1851 +10.0980

Dollar/Sweden 8.8068 8.7334 +0.05% +7.45% +8.8122 +8.7233

Euro/Sweden 10.2104 10.2055 +0.05% +1.33% +10.2175 +10.1816

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting Iain Withers in London; Editing by Angus MacSwan, Kirsten Donovan, Philippa Fletcher, Will Dunham and Jonathan Oatis)

Evergrande Nerves Weigh on Offshore Yuan, Dollar Edges Up on Safety Bid

Market sentiment has been rattled by the potential contagion from Evergrande, which is trying to raise funds to pay a host of lenders, suppliers and investors. A deadline for an $83.5 million interest payment on one of its bonds is due on Thursday, and the company has $305 billion in liabilities.

On Thursday, the yuan strengthened to its highest level in three months at 6.4226 per dollar before starting to reverse as Evergrande’s woes worsened. The move sharpened on Monday after warnings from Chinese regulators that the company’s insolvency could fuel broader risks in the country’s financial system if not stabilized.

Analysts at Wells Fargo said on Monday they expect the dollar to reach 6.60 per yuan within the next month. The offshore Chinese yuan last weakened versus the greenback at 6.4839 per dollar.

“We are seeing a classic flight to safety in the dollar until we get some sense of clarity on whether or not it is going to be an orderly or disorderly resolution to Evergrande,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.

“We were likely to see a continuation of the decline we’ve seen in risk assets going into this week and you throw in Evergrande and it has really unsettled the markets.”

The dollar and other safe-haven currencies such as the yen and Swiss franc gained with the risk-off sentiment, which saw Wall Street’s S&P 500 index on pace for its biggest one-day percentage drop 11 months.

The dollar index rose 0.025%, with the euro unchanged at $1.1725.

The dollar has also been gaining ground on expectations the Federal Reserve will begin reducing its monthly bond purchases this year, with the central bank’s policy announcement due on Wednesday.

Aside from the Fed, multiple central banks around the globe will hold policy meetings this week, including those of Sweden, England, and Norway.

The Japanese yen strengthened 0.58% versus the greenback at 109.32 per dollar, while sterling was last trading at $1.3656, down 0.63% on the day.

The Canadian dollar, also a commodity currency that correlates with risk sentiment, weakened to as low as C$1.2895 per dollar, its lowest level in four weeks. It last fell 0.42% versus the greenback at C$1.28 per dollar.

Polling for Monday’s national election in Canada points to an advantage for incumbent Prime Minister Justin Trudeau, but he is unlikely to gain a parliamentary majority.

In cryptocurrencies, bitcoin last fell 7.76% to $43,577.67.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Bernadette Baum and Cynthia Osterman)

Norway Set for Rate Hike as Economy Accelerates, Statistics Agency Says

“The reopening of society is well underway, and the upswing in the Norwegian economy continues. The COVID-19 pandemic will nevertheless continue to impact on the economy for a long time to come,” SSB said.

“The first interest rate jump is expected to be in September.”

Non-oil gross domestic product (GDP) will rise by 3.6% in 2021, the agency predicted, more than the 3.1% growth seen in June, while next year will see expansion of 3.8%, down from 4.1% predicted three months ago.

SSB at the same time raised its growth forecasts for 2023 and 2024.

The Norwegian central bank last year slashed rates to a record low 0.0%. It has said it intends to hike twice this year and three times in 2022, likely beginning at its next policy meeting on Sept. 23.

The key policy rate will likely rise to 1.75% in 2024, SSB predicted, in line with the agency’s previous forecast.

Statistics Norway’s forecasts are based on authorities expecting to fully vaccinate some 90% of adult Norwegians over the next four to six weeks, SSB said.

“If these assumptions are not fulfilled, further economic recovery will take longer than our calculations show,” it said.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Terje Solsvik, editing by Gwladys Fouche)

Take Five: Interest Rate Lift-Off Ahead

1/ READY, STEADY, GO

New Zealand’s central bank meets on Wednesday and looks set to become the first major economy to lift interest rates since COVID-19 hit.

Super-strong jobs data have cemented expectations of a hike, which would be New Zealand’s first since mid-2014. What a contrast with 2020, when rates were slashed 75 bps to 0.25% and a move below zero became a real possibility.

Norway’s central bank, meeting on Thursday meanwhile, could reiterate it will increase rates in September.

Investors, focused on prospects for Fed tapering as labour conditions improve, have boosted the dollar. New Zealand and Norway are a reminder that the greenback is not the only currency standing to benefit from the monetary policy shift under way in the G10.

– New Zealand inflation expectations jump in Q3 -RBNZ

2/ MALLRATS

The U.S. economy is growing robustly and the labour market is rebounding. However, COVID-19 remains a headwind and coming days should bring a fresh perspective on how consumers are faring.

U.S. retail sales likely fell 0.2% in July, after an unexpected rise in June, data on Tuesday is expected to show.

And several large retailers including Walmart, Target, Lowe’s and Home Depot will report quarterly results. Earnings are due too from Ross Stores, TJX Companies and Bath & Body Works.

These come at the end of a stellar U.S. second-quarter results season. S&P 500 earnings are expected to have jumped 93.1%, well above prior expectations of 65.4%, according to Refinitiv IBES.

Fed policymakers, assessing when to start unwinding stimulus, will be watching.

-Fed officials grapple over timeline for tapering asset purchases

3/ DELTA BLUES

The Delta variant is close to breaching Asia’s COVID-zero fortresses, with outbreaks and lockdowns looming over what once appeared the world’s most promising regional rebound.

Save for Taiwan and New Zealand, where strict border controls appear to have kept the variant at bay, cities from Sydney to Seoul are finding it hard to contain infections.

In China, Delta has been detected in over a dozen cities, bearing down on a faltering economy, forcing economists to cut growth forecasts.

Data on Monday only adds to signs that the economic recovery is losing momentum – China’s factory output and retail sales growth slowed sharply and missed expectations in July.

– China economy under pressure as factory output, retail sales growth slow sharply

– Wall Street investment banks cut China growth forecasts

4/ APOCALYPSE NOW

If this summer has shown us anything, it’s a glimpse of the sort of havoc the planet faces if the climate emergency is not fixed fast.

Apocalyptic forest fires, floods and drought are laying waste to swathes of Greece, Canada, Turkey, China, Argentina and the United States. Extreme weather consequences include deaths, homelessness, social unrest and rising government debt.

The climate emergency will raise costs everywhere: insurance covers just 60% of disaster-linked losses even in rich North America; it falls to 10% in China, Swiss Re estimates. Worse still, the fires are exacerbating emissions, while forests meant to act as carbon sinks will take decades to regrow.

Until now, warnings, including a recent United Nations one, have had limited impact. But with a global climate conference due in November, this summer’s climate disasters might well swing the pendulum.

-U.N. sounds clarion call over ‘irreversible’ climate impacts

5/ AFGHAN ABYSS

The Taliban have declared the war in in Afghanistan over after taking control of the presidential palace in Kabul, raising alarm over Afghanistan’s future and the wider spillover in what is already a dangerous neighbourhood.

Iran to the west, the central Asian republics of Tajikistan, Turkmenistan and Uzbekistan to the north may be at risk, but for markets, Pakistan to the east will be the immediate focus.

Pakistan has lots of debt and a sizable equity market. It also depends on a $6 billion IMF programme. The prospect of years of Taliban violence and mass waves of Afghan refugees will add to the struggle to repair its finances.

– Taliban declares ‘war is over’ as president and diplomats flee Kabul

– IMF says Pakistan talks ongoing; more work needed on structural reforms

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Tom Westbrook in SINGAPORE, Lewis Krauskopf in NEW YORK, Sujata Rao, Marc Jones and Dhara Ranasinghe in LONDON; Compiled by Dhara Ranasinghe; Editing by Susan Fenton and Giles Elgood)

Trading Currencies: One Down, One Still Very Much Standing

The 2 major risk events of the past 9 months continue to be the key drivers of FX risk trading.

  1. Caseloads of COVID-19 and a possible vaccine to it.
  2. The US presidential election.

The second point has now officially been ‘declared’ with President Trump finally allowing a transition process to President-Elect Biden to begin. This was probably seen as an ‘unexpected’ outcome considering the Trump team is still pursuing legal challenges in several of the swing states yet to official declare.

However, with Georgia officials declaring this week if there will be any legal challenge remaining, that could, in theory, be successful in the remaining states. Yet, it would still not be enough to get Trump to 270 electoral colleague votes that are needed to be re-elected. This ‘risk event’ is now officially over. However, the Trump presidency is not – that is still official until January 19 and there are still some risks here.

Is it time to go for risk-on markets?

The reaction to Trump’s concession was one of risk-on, the equity market made record highs in the US and the USD fell against all G10 currencies on the news, with risk currencies in the form of the AUD, NOK and SEK being the biggest movers.

AUD/USD is again through $0.73. While FX strategists at UOB group predicts that the pair may break above 0.7400 in 1-3 weeks’ time, the question for it over the final week of 2020 is will the risk levers continue to push it higher? And, will that mean a year-end target of $0.75 is still possible? The macrothematics suggest yes, but real events could still be a headwind.

Namely COVID-19 cases.

That first point is really the major catalyst now for further risk rallies or pull backs, and as discussed in last week’s note caseloads are still growing almost exponentially in the US and Europe, not to mention that global cases have already surged past 60 million, which is weighing on short-term confidence.

Beware of short-term risks

Case-in-point: the US consumer confidence fell to back into pessimism in November to 96.1 from 101.4 (100 is equilibrium). Future expectations deteriorated (fell to 89.5 from 98.2) specifically due to a resurgence in COVID cases and the subsequent restrictions. The Richmond Fed manufacturing survey for November fell more than expected, to 15 versus estimates of 20 and well down on last month’s record high of 29, most components slipped and the most notable was new orders down to 12 from 32.

This must be seen as a short-term risk for FX. Watch for possible switching to the JPY and CHF as traders cover possible volatility to end the year.

Key dates before the end of 2021

Major events that can bring volatility to the markets in the remaining weeks of this year:

  • December 10 – Vaccine Development: Some sources suggest that Emergency Use Authorization for both Pfizer and Moderna vaccines may potentially be approved on this date
  • December 14 – US Presidential Election: Members of the Electoral College will meet and cast their ballots for president and vice president
  • December 31 – Brexit: End of the transition period

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.

Positioning the Secret Sauce for Further Gains in Risk

S&P500 and NAS futures opened a little lower, but have come roaring back with Asian equities firing up nicely, despite selling in crude futures.

Forex

Certainly, the MXN has worked well of late, and it feels like in the absence of a pullback in stocks and a further reduction in implied vol that USDMXN heads for 23. EURMXN could push through the 50-day MA (25.64) amid the favourable environment for carry positions, although, much still depends on price action in crude which, as I say is giving back some of last week’s 25.1% rally. I also went short EURAUD as a trade and feel the downside has opened up nicely here – here is my trade rationale.

AUDUSD continues to have lock-on on the S&P500 futures, with the US equity benchmark putting on 3.5% last week, dwarfed only by a 6% and 5.5% rally in the NASDAQ and Russell 2000, respectively.

AUDUSD daily – pushing the 100-day MA
AUDUSD daily – pushing the 100-day MA

S&P500

On the daily, the S&P500 will be eyeing a break of the 29 April high of 2954 and from we make an assault at 3000, which is obviously the round number, but the 100- and 200-day MA also sit here too. We are also told this is the line, where the CTAs (trend-following funds) flip to increase long positions in S&P500 futures, a development that could take us materially higher.

Looking at 5-day realised volatility in the S&P500, we see it has come down to 16.4%, from a high of 176% (17 March) and we’re back to pre-crisis levels and one suspects if vol sellers push the VIX closer to 20% (currently 27.98%), vol-targeting funds then enter the fray too.

White – S&P500 5-day realised volatility/RV, orange – 30-day RV

Source: Bloomberg

This, again, would be positive for risk FX such as the NOK, AUD, NZD, MXN and ZAR.

I have been guilty of not wanting to chase this rally in equity indices, but the lack of any follow-through in the selling (pick up in vol) has certainly lowered the impulse to short risk. I do see us moving past peek stimulus inspiration, with the Fed’s balance sheet growing at an ever-slower pace, as they do for other central banks, although the commitment to do more should we see a second wave in the corona virus is key.

On the fiscal side, the US House is due to vote on a Phase 4 bill on Thursday, rumoured to be close to $750b, and it’s uncertain that will pass, with Trump making it clear he wants to tie this in with a payrolls tax cut.

It is also clear that this is not a time for thinking too intently about valuation, with the S&P500 commanding an incredible 23.06x 2020 earnings, while 2021 FY earnings sit at 18x – economics have not played into considerations either. These are markets boosted by actions from the Fed to support credit and liquidity more broadly.

Re-positioning from hedge funds, specifically the systematic and rules-based crowd has been key and will be the reason, if it happens for new highs in US equity markets.

Consider that cash in money market funds, the safest of safe, has grown 30% since March, so there is still a ton of cash on the sidelines.

We can also look at the futures position in S&P500 futures held by non-commercial players and see this held net by short 222k contracts – that’s the largest net short positions held since 2015 and over two standard deviations of the 10-year average.

Total US$ value in money market funds

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Source: Bloomberg 

The disconnect between economic reality and valuation is keeping a lot of discretionary players from entering the market here, and that is fair as it feels incredibly wrong to buy risk – I guess that is one of the many reasons why a systematic approach can work in one’s favour.

So, we watch the S&P500 and NAS futures through Asia, where both markets were down smalls early doors and are coming back to the flat line as I type. There is little to trouble on the data side, although tomorrows (22:30aest) US CPI could be interesting with headline expected to drop 0.8% MoM and core -0.2%, amid a fierce debate on whether we get inflation or deflation as a result of COVID-19.

Retail sales (Friday 22:30aest) would typically get a strong look-in, and calls for an 11.7% decline won’t go unnoticed, but just as we saw with the 20m jobs lost in Fridays NFP and the failure to move markets; economic data at the moment is largely irrelevant, at least for markets – who will be looking intently on re-openings in the US and Europe, with plans to do so in the UK, Australia and others.

What could be important is the raft of Fed speakers this week, which you can see on the calendar below. Fed chair Powell mid-week speech will be the highlight, especially, with all the talk of negative rates that were priced into the rates market most intently on Thursday. In a crisis, you leave everything on the table, and things move so fast that what the central bankers say one day may not count the next. So, while Powell sits in the camp that negative rates are not warranted – he has been consistent on this message – it makes some sense for Powell to be vague enough to keep negative rates as a future option.

He can remove pricing from the fed funds future by lifting interest earned on excess reserve (IOER) by 5bp. However, with yields on 2- and 5-year Treasuries at record lows, in turn supporting sentiment more broadly, and reducing the appeal of the USD, it has pushed traders out the risk curve. Therefore, it makes sense for Powell to be somewhat vague on the subject.

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As the week rolls on front-end yields (2 and 5-year USTs) could matter for the USD this week and presumably for gold too, which maintains the 1738 to 1675 range. USDCNH continues to be a central focal point and barometer of sentiment towards the US-China relationship, while inflation expectations and implied vol continues to be central too.

Good luck to anyone trading the Bitcoin Halving today, with price trading lower into the event. It seems we are seeing a buy the rumour, sell the fact scenario play out before the fact it seems.

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Chris Weston, Head of Global Research at Pepperstone.

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